Silver Lake Resources

Gold miners of every size have been hammered. The gold price, which is down from highs of $1,900 an ounce in September last year to $1,500 an ounce today, has undoubtedly played a part. So has fear. Investors are shying away from risky assets and gold miners are in the cross-hairs. Our favourite miner, Silver Lake Resources, has been caught in the carnage. From highs of $3.80 in December, its share price has tumbled to $2.17 today. It’s a steep enough fall to warrant an upgrade.

Low costs and well understood geology are the keys to its success. In its latest quarterly, Silver Lake announced cash costs of less than $600 an ounce; even at today’s lower gold price, the miner is generating operating margins of about $900 an ounce. Production is set to increase, too. A new production area, known as Murchison, is currently being developed and will add 100,000 ounces of gold, doubling existing output. All up, the miner aims to lift production to 300,000 ounces a year by 2014. With $100m cash and no debt, Silver Lake can easily finance that ambition. The company aims to spend about $20m a year on exploration but current resources support production plans. Lower gold prices remain a key risk; a return to a gold price below $900 would eliminate profits. 

The share price has fallen but nothing has changed. Silver Lake remains a low cost miner with simple, growing resources. The 32% fall in the share price since 10 Apr 12 (Hold - $3.19) makes it even more attractive. At current gold prices, simple calculations suggest a net present value between $2.50-$3.50 for existing production, depending on your choice of discount rate. Adding production from Murchison potentially increases this to about $5 a share. Mining gold, as always, is a high risk, speculative activity. But for members seeking gold exposure, we’re upgrading Silver Lake to SPECULATIVE BUY for 3% of a risk tolerant and gold loving portfolio.  

Note: The Growth portfolio owns shares in Silver Lake Resources.